Perhaps Treasurer
Joe Hockey
should have taken his recent holiday in Mexico. Forget the margaritas. He might have picked up a few helpful hints on how a new government can undertake massive structural reform despite a sluggish economy, and how to negotiate with minor parties to get legislation passed.

The latest reform signed into law this week by President
Enrique Peña Nieto
is to open up Mexico’s vast oil and gas and electricity industries. This doesn’t amount to privatisation, due to a fiercely protectionist view of the Mexican oil industry since it was nationalised in the 1930s, and the state-owned oil giant Pemex became an enduring symbol of national pride.

The changes allow international companies to explore, produce and refine oil and gas in Mexico for the first time since then, injecting private capital and expertise in return for a share of profits, if not ownership.

Mexican ambassador
Armando Alvarez
says this will bring many possibilities for joint ventures, trade and technical co-operation with Australian energy companies. Many have already expressed interest.

Australian companies will still have to join an inevitable international rush to participate in the latest national energy revolution. Mexico’s ability to properly develop its abundance of natural resources has long been stymied due to Pemex’s sclerotic grip. Exploration is meagre and there is no technical expertise to tap the natural wealth in Mexico’s deep waters.

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At the same time, production from drilling in shallower waters of the Gulf of Mexico has fallen sharply, a remarkable achievement, while the company has huge losses in its refining and petrochemicals arms.

But given rising instability and the emergence of threats elsewhere in the world, the Gulf of Mexico and the Mexican political system are relative havens of predictability – all that drug-based violence and corruption notwithstanding. And Mexico’s proximity to the frenzy of oil and gas exploration and development in adjoining United States territory demonstrates the potential value of the prizes on offer. Peña Nieto declared this week that the reforms would mean the extraction of deep-water oil and the use of Mexico’s great shale deposits to generate electricity at much lower costs.

Lure of a bonanza

Given how a new shale gas industry and cheaper power have underpinned the revival of the US economy, particularly in manufacturing, the lure of a similar bonanza in Mexico is obvious.

It will still be necessary to make the tax and royalties system appealing to attract large scale investment – a sensitive issue in any country, let alone Mexico. But in just over 18 months of a six-year term, Peña Nieto has demonstrated a remarkable determination to transform the world’s 14th largest economy and free it from the economic purgatory in which it has languished for so long.

The president came to power on that promise and immediately announced a “pact for Mexico" rather like the Hawke government’s accord to formalise a national commitment to major changes in approach.

And not before time. Mexico prides itself on a comprehensive web of free-trade agreements befitting an export-oriented economy, the improving ease of doing business and a young and relatively skilled workforce in everything from IT and electronics services to car manufacturing to the aerospace industry.

Its official unemployment rate is under 5 per cent (noticeably lower than Australia’s) although there is a far greater level of underemployment.

But this still doesn’t translate into living standards rising anywhere near fast enough for the majority of its 118 million citizens. When I visited Mexico earlier this year, for example, I was struck by the relative lack of people talking constantly on mobile phones as they do everywhere else in the world.

Could this, I wondered, have anything to do with a monopolistic telecommunications system with charges to match, that has helped make
Carlos Slim
, head of Mexico’s mobile phone company, America Movil, as well as its dominant land line company, Telmex, the world’s richest man? Sí Señor.

Landmark reforms in areas like labour deregulation, competition laws, telecommunications, tax, banking and financial services, education and the pension system quickly followed Peña Nieto’s election – despite a very complicated process of getting constitutional change and then detailed “secondary" laws in place. And despite the resistance of many of those large organisations directly affected.

The economic impact of these reforms is still filtering through more slowly than the government had predicted. Mexico has a very large informal economy which is far less productive and far slower to adapt to change than its more competitive tradeable sectors. That’s also where most people are still employed. New taxes have hit the poor hard as well as the rich, while most of the expected government investment in infrastructure is still waiting to be released until plans are finalised.

The Mexican economy is supposed to grow at 2.7 per cent this year but couldn’t manage anywhere near that pace in the first half. Political pressure on Peña Nieto will only increase the longer the promise of growth takes to pay off. But big choices and big changes – along with the political ability to implement them – do matter to countries. Big time. Expected growth in regional competitors like Brazil – with equally abundant natural resources – has bogged down as lack of domestic reform deters investment and destroys confidence. Over to you, Joe.